Dennis L. Fink – Executive Vice President and Chief Financial Officer Clarence H. Smith – President and Chief Executive Officer.

Bradley Thomas – KeyBanc Capital Markets Budd Bugatch – Raymond James & Associates Todd Schwartzman – Sidoti & Company, LLC Kristine Koerber – Barrington Research Associates, Inc..

Welcome to Haverty's Q2 2014 Financial Results Conference Call. Today's conference is being recorded. At this time I would like to turn the conference over to Dennis Fink. Please begin..

Thank you, operator. Good morning, everybody. During this conference, we’ll make forward-looking statements which are subject to risk and uncertainties. Actual results may differ materially from those made or implied in such statements which speak only as of the date they are made and which we undertake no obligation to publicly update or revise.

Factors that could cause actual results to differ include economic and competitive conditions and other uncertainties detailed in the company's reports filed with the SEC. Our President, CEO and Chairman Clarence Smith, will now give you an update.

Clarence?.

Good morning. Thank you for joining our second quarter conference call. As we reported earlier our sales for the second quarter increased 2.4% to $175.1 million. Our comparative store sales increased 3.2%. Our comparative store written sales were up 5.3% after adjusting for Easter.

Sales were up primarily due to the increase in the average ticket of 3.6%, with traffic slightly down and closing percentages flat. Our total sales for the first half of the year are virtually even with last year’s sales which had been up 13.4% over 2012’s first half.

Total written comparative store sales for the third quarter to date are up approximately 3.3% on top of last year's quarter-to-date increase of 9.5%. As a reminder, delivered comp sales for the full third quarter were up 10% in 2012 and 11.8% last year.

Our pretax earnings for Q2 were $7.8 million flat with last year's, and EPS at $0.21 equal to last year. Gross margins were 53.8% versus 53.4% last year and equal to this year’s first quarter. Our store opening and relocation program for the second half of the year is the most aggressive plan in over a decade.

We will open six stores, which includes three store relocations in existing markets and three additional new stores. We plan to net one new store for the year after relocations and closing two less productive stores, ending the year with a selling square footage increase of approximately 2%.

We believe that these new stores will significantly improve our competitive positions in several key markets in our regions, including Dallas-Fort Worth, Southeast and Central Florida, the North Carolina Piedmont region, and Atlanta.

In addition, we have major remodeling projects underway in four of our best stores, which will be completed for the fall selling season. We completed the addition of extra rack storage in our Florida DC, which increase the storage capacity by 25%.

This should allow us to more quickly serve those customers by receiving more containers of our coastal products direct from our vendors and saving shipping and handling costs.

We have plans to increase the storage capacity of our Virginia home delivery center by the end of the quarter, which should also improve our delivery times and reduce shipping costs. We are continuing to invest in enhancing our website and mobile access, as well as new means of extending the aisle in our stores by using the latest digital tools.

We put in new ways to improve the customer's experience in special orders and custom choice with the latest fabric draping tools and a 3D room planner, which we expect to have in place in the fourth quarter. Our H Design program is continuing to gain traction throughout the company.

We have a goal of assisting our customers in making their vision of their homes come true by encouraging them to fully utilize our in-home H Design service. We know that we provide a better service and also increase our average ticket by over two times once our designers are able to advise customers in their home.

Our stores with the most established design programs have H Design sales of 20% of the total store's sales. We are excited by the new stores underway for the remainder of this year and the significant lineup of new products in the pipeline, which we expect to have in the stores in time for the Labor Day holiday event.

This year's CapEx spend of $34 million is heavily weighted to the second half. We believe that our ongoing investments in technology and the store remodeling and repositioning that we began four years ago has put us in a strong position to gain share in many of the best markets in the country. I'd now like to turn the call back over to Dennis..

Thank you, Clarence. In our earnings press release last night the financial highlights were covered, and I won't repeat all of those now. But we customarily give guidance for expected gross margins and SG&A expenses for the current year within each of our earnings releases.

We don’t publicize any sales forecasts but do announce our actual sales within a few days after each quarter-end and disclose how sales for the first month of the new quarter are trending when we announce our quarterly earnings.

The guidance we gave for 2014 gross margin and the variable versus fixed discretionary components of the SG&A back in February of this year are essentially the same as reiterated in the expectations and other section of last night's press release.

The second half 2014 fixed and discretionary type expenses within SG&A include a $2.6 million increase in total advertising spend versus last year's second half and approximately $1 million of pre-opening expenses for the six new stores that will be incurred in the second half.

Two of those stores open in the third quarter, and four of those stores will be coming inline during the fourth quarter. So during 2014, Clarence mentioned, we expect retail square footage to be 2% higher than a year ago, but for most of the first half, we have had two less stores open than a year ago.

And based on our current rollout plans, the change in the weighted average retail square footage open compared to last year is as follows. We were down 1% in the first half square footage weighted average this year versus last year.

In the third quarter we will still be down about three tenths of a percent in square footage, and in the fourth quarter on average we will be up eight tenths of a percent square footage. So, for the full year the weighted average footage will be about four tenths below last year.

Next year, however, with these new stores online late this year and some other openings next year, we expect our weighted average footage for 2015 to be up 4.3%. So that will give a boost to sales, obviously. The expense increases for the efforts underway opening new stores should pay off in additional sales next year and beyond.

Operator, we will take questions at this time from the audience..

Thank you. (Operator Instructions) And we’ll go to Bradley Thomas with KeyBanc Capital Markets..

Hi, thanks good morning, Clarence, good morning, Dennis..

Good morning..

Good morning, Brad. .

I wanted to first ask about the ticket that continues to be a bright spot for the company. It feels like you have a lot of opportunities to drive that higher, but the growth in ticket has moderated over the last year or so.

Could you just give us an update on maybe if there was any specific drivers in this quarter on ticket? And maybe what inning you think you are in for some of the drivers that we have to look forward over the next couple of years?.

Well, the H Design program is certainly helping drive that. We're rolling that out pretty aggressively. It was put in place initially in Florida and then in some of the markets here East, and we are moving aggressively to put them in our best stores right now. So, I think that will continue to drive it.

So, as far as the special order program and the custom choice that we have in upholstery – that is continuing to drive our business, and I think it’s going to continue to grow. So, I would guess we are maybe in the fourth inning, let's just say something like that. I think we’ve got a lot more room to go there. .

Great. And then I noticed that the customer deposits were up about 21%.

Could you maybe talk a little bit about what you are seeing in terms of the speed that you are getting in inventory from some of your suppliers, and maybe your opportunity to work through that backlog in the next quarter?.

Yes. The backlog has been an issue. It clearly shows up there. The case goods issue – the problems we had with some suppliers, we are working through. And now we have run into some container issues, getting them through the ports. As you know, that’s kind of backed up. But I think that will be cleared up mostly this quarter. We are receiving very heavily.

In August, we think we will be in good position for Labor Day. And so August and September we've got getting our backlogs down and also bringing in new product, which we are very excited about. So it's a struggle. We've got a plan. We've moved a lot of the product that was in China to Vietnam and Indonesia, and that’s flowing now.

I think certainly above the end of the year will be in good position. I think that as far as the backlog, it will start to come down significantly by the end of this quarter..

Great.

So connecting the dots from a modeling perspective, do you think we are in a position where perhaps the delivered sales could be a point or two higher than the written sales in the coming quarters? Would that be a realistic assumption?.

I’ll let Dennis comment..

Yes. It’s realistic. The offset to that would be, as Clarence, was talking about, special order and home designer assisted sales. Those do have bigger tickets. Those do involve the products that have somewhat of a lead time on them – not a big lead time, but three, four, five weeks. So those orders don’t fill out as quickly.

So the more that increases, that's going to be a natural increase in our undelivered sales. But the offset, of course, is the supplier performance and we do tend to get our – seasonally the end of December is usually the low point of the year for undelivered sales.

So, I can’t tell you exactly which quarter and how much, but for the second half certainly we ought to have a higher delivered sales volume than written..

Right. Great. Well, thank you so much. .

Thank you, Brad..

And our next question comes from Budd Bugatch with Raymond James..

Yes, Clarence good morning and good morning, Dennis thank for taking my question. I guess my issue or my worry is always about traffic. We've been struggling for a while to get traffic up. We are going to boost some advertising.

Help me understand what might drive traffic better, and where are we on the continuum? I know people spend more time now online before they come into a store, but we kind of lapped that. So we should be starting to see, I think, some traffic increases.

Is that the way you look at it, Clarence?.

I’m not sure exactly how it will play out. I will say that the fact that we were flat in traffic is pretty good. We had been seeing it down. I think that we are improving our stores. We are making them look better people – once they understand what we've done, I think we will be able to attract and hold more people as they come in.

And I think they are staying in the stores longer. So, I think it's a trend that is going to be permanent in that more people go to the Web. So that’s why we are spending more energy on our mobile and our website, to make sure that it’s attracting them, that we are giving the information to them that they want.

I don’t think we are going to see a jump in traffic anytime soon, just because the people are shopping differently today..

Hi, Budd. I will add to that that I think there will be more people in the market for furniture when the housing numbers get better. It’s been a little disappointing the last few months with housing. We did have some good reads on the GDP increase for Q2, and also the consumer confidence number was up.

But the main drivers, macro drivers, that help us is housing turnover, particularly new home sales. I think there will be more people in the market when that comes back to something other than slightly off the lowest record numbers. So, when that happens, maybe we'll get some traffic increase then. But shopping patterns have changed.

What we would hope is that possibly closing rates go up to offset or more than offset fewer people actually in the stores, if we are engaging them better before they get there and our advertising is making them identify with how we approach home furnishings. .

Okay. And I guess for me the last part – talked about the website and maybe changes to that and capabilities with e-commerce.

What plans might you have on that score that you can disclose and talk about?.

Well, we are going to be investing – continue to invest heavily there. We mentioned several tools that we will have online, including the 3D room planner. We’ve also enhanced our special order capabilities with the custom choice. That’s easier to do on the website. It’s more of designing now for the mobile.

And then, first, before you design for what it’s going to look like on the web. So that’s where we’re spending our energy now. You've seen that we have a new head of marketing, who has a lot of Internet background and a lot of web background, which I think will help us. So it’s certainly a focus for us..

Okay. Thank you very much..

Thank you, Budd. .

Our next question is from Todd Schwartzman with Sidoti & Company..

Hi, good morning guys..

Good morning, Todd..

I just wanted to follow-up on Budd's question initially.

How much of the incremental SG&A spend is dedicated to the increased digital presence?.

It’s probably a better measure to look at our CapEx for that.

What would you say, Dennis on that?.

We have been $3 million or $4 million a year on IT CapEx, and a bigger portion of our ad spend has been pushed towards digital. I think that's going to do nothing but continue to increase.

Some of the other parts of that it’s staff people spending a lot of time getting their renderings right for improvements that we are making on the 3D and the – also the custom order visualization.

So, I think whatever we have been spending, there will be more of the total spend allocated to digital and I can’t given you an exact number, because it kind of morphs into just your whole marketing plan, and how – and your IT, the people on staff, what they spend their resources on..

Well, to your point, more of our merchandising staff is directly involved in exactly what you are talking about. Making sure the imagery is right and that the accessibility is easy – and certainly more of our IT team. And in our advertising we’re moving away from print in going more to digital.

And that’s where most of those dollars that were in print are going. We're in digital and television, and the digital part will grow faster than any other..

Yes, there will be a time when it’s hard to draw the line between digital and TV, even, because – just the way things are changing. And we’ve got – as Clarence said, our new Senior VP of Marketing is extremely skilled in that area. And we are anxious to be developing plans based around her knowledge and experience.

I think some of it is to be determined, but we are excited about having that kind of expertise, along with our ad agency that's advising us how to continue to grow our presence..

So for 2015 modeling purposes, would you say that the incremental year-over-year expenditures are more heavily weighted to the front half of 2015? Or is it more of a steady, straight-line increase from quarter to quarter?.

Todd, we just about always have a bigger ad spend in the second half, because that is when more of our sales are expected to be generated and are generated. We have stores next year – we have four stores slated for opening and two of them are in the first quarter; and one is the second quarter; and one is the third quarter.

So there will be a little more opening expenses in the front half, but then, I think to your point about when the marketing spend – I think it will follow that seasonal pattern. Really, our second quarter is the weak quarter. The springtime in our latitudes is more outdoor-oriented than it is indoor furniture oriented.

So I think you will see – we haven't guided yet on 2015; we will in our next quarter, but you will still see a second half higher than the first half. It's just this general trend of the ad spend is more a portioning thing rather than an incremental..

Can you give us some insight into the 2015 store expansion plans? I know that a number of markets that you called out in the remarks today are being addressed over these next few months, but I just want to think longer term – what's the landscape look like?.

Well, we don't announce the locations until the leases are signed. We have a focus on Southeast Florida, as we've said, and that’s one of the areas and then the Texas area. So those are our focuses for next year..

Okay. Clarence, in the press release you had referenced your urban scaled format.

I wonder if you could speak a little bit to that, just talking about the size, the merchandise mix, anything that you'd use to differentiate it from your traditional store format?.

We are putting a lot of effort and energy into a new store we are opening here in Buckhead, which is going back into our old location, we used to be in 23 years ago – which we are very excited about, and it is a smaller format. It's in the mid-20,000 square foot as opposed to in the mid-30s.

And it will be more contemporary, more metro, more special order, more decorator oriented. And we'll using a, of different tools to help, as I mentioned, extend the aisle digitally. So we are spending an enormous amount of effort on that prototype. And from that we'll be using some of those key points in these new stores that we’ll be opening.

So we recognize the customer is shopping differently. And as we try to separate ourselves from the promotional houses, we have to give her the tools that she's looking at, that she needs to make a decision, to make her room the way she wants it to be..

Got it. I wanted to just ask about the custom upholstery written business, up 13%.

If you look back to the start of second quarter of 2013, at that point in time, for how long had you been taking custom upholstery orders in all of the stores?.

Well, we have been doing it in every – I mean, we've been doing this for years to some extend. It's just been expanded significantly. As we have upgraded our program, we added a vendor who was specifically oriented to do that, and we've added another one.

Upholstery itself is the fastest-growing category, and special order is the fastest-growing category of that. So it's been something that we have been working on for years, I think it’s now getting real traction I think we get credit in the marketplace for the fact that we do it, and we execute well.

And our vendors are doing a better job of shipping quickly for us. So it's a building program that we'll continue to work on and I think as I mentioned earlier, the in-home design or H Design program, will be a real catalyst to make that grow faster..

So that double-digit growth is not really a function of a low prior-year base?.

I don’t think so, I mean, it's just continuing to build. If you went back maybe three years it would be. But the last several years, we’ve doing a really good job with it..

And lastly, on the in-home design, I'm wondering if you could just share your learnings with us.

How are the customers embracing the in-home interior design serviced by age group, by age of consumer?.

I don't have the detail on that, but I will just give you my anecdotal view of it. I think that we are finding the people that are buying a new condo – let's say in Florida. They have moved into new condo. They want to redo the whole thing, and they don't have any idea how to do it. And so they come in looking for a sofa or something to just start.

They deal with our salespeople. We find out that they might be interested in having some help, and then we bring in a designer who gets in their home and helps them figure out how to do this better than they could possibly do it on their own. So it's probably not a very young customer, because they may not have the funds to do this.

But anybody that is trying to redo the look of their home, whether they are 35 years old or 50 years old, I think is pleased that we’re able to provide that service, and we have the professional help that can get in their home to do that..

All right. Thank you very much..

Thank you, Todd..

(Operator Instructions) We will go to Kristine Koerber with Barrington Research Associates..

Good morning..

Good morning, Kristine..

I have a few questions. First, can you give us a little more color on the higher incremental expenses in the second quarter, that $3.1 million? How much of that was related to warehouse, and the commissions, advertising? That would be helpful..

Yes. First, the advertising piece of that. It was about $1 million. For the first half it was actually $1.5 million and most of that was second quarter. The other were called out, but it was mostly efficiencies.

The first quarter, which we had have same effect – and that was from the weather problems we had so many days where we had to reschedule a significant number of deliveries, and also there were inbound problems with the weather related. It was just not an efficient flow.

In the second quarter that continued little bit, with some of these slower responses and uncertainties about the delivery or some of the case goods. And I think it was largely a function of that staffing-wise. I mean, as we started the year. We would have expected more sales in the first half.

Staffing-wise, we weren't as regular in terms of predicting and fulfilling orders based on the supply chain issues. So one other thing is just workers' comp is higher this year for all of the heavy work people –the distribution/delivery. But there were other things that offset that in administrative expenses and some other.

So we were – like I said in my comments, we were really kind of in-line in total for the spend levels, but those were called out. We did – the advertising was anticipated, as well; it wasn't a surprise. So that's kind of a general framework of it..

Okay. That's helpful. And then as far as geographically, how were trends? I mean, did you see a bigger uptick in certain markets that were affected by weather? I was just wondering if there was kind of pent-up demand..

Well, looking back, yes. I'd say certainly the Florida stores outperformed the others, certainly, when we had weather. We are seeing the best growth in Florida and in Texas, the central parts of our territories. The mid-South is weaker, and then the East is probably right in the middle..

Yes. I will say back in April, we saw a little bounce, which we talked about in our last quarter-end call, in some of those markets – because that was when they were digging out of the heavy weather. Since then we haven't seen a recurring bounceback. We have just seen the markets Clarence called out as being stronger..

Okay.

And then as far as the number of interior designers, are you still on track? I believe it's 100 at year-end? How many do you have now?.

Yes. We are on track to have that by the end of the year, yes..

And how many do you have currently?.

I think, it’s 88 or something like that in the high 80s. We will have the right at 100. And that might be before the end of the year, but that's certainly something that we have set as a goal that we are on track for..

Okay. And I believe you said in your opening remarks that you are remodeling four of your best stores.

Is that correct?.

Yes. They are underway right now, which does affect our sales while that's underway. But they will be complete by Labor Day at least three of those will be, and we trying to plan these so they have – when they are having the disruption, it’s at weaker times. And this is some of the weaker, between now until the Labor Day event starts..

And are those – are they in Florida, Texas located?.

They are three different markets, and none of them are in Florida..

Okay. And then…..

We do have new stores opening in Florida, though, this year..

Okay. Great.

And then, lastly, as far as the new Buckhead store, the smaller store prototype – what's the timing of that? Is it a September opening?.

October. It's planned for October. Early October..

Okay. It’s great. Thank you so much. Thank you..

Okay, thank you, Kristine..

Thank you, and there are no further question..

Thank you, so much for joining our call, and we appreciate your interest in Haverty's..

That concludes today's conference. You may now disconnect..